Greece? Just a Side Show if the U.K. Defaults

In our younger years we were quite accomplished at the “Match Game” on Sesame Street – to some we have just hopelessly dated ourselves, to others we hope to have given you a nostalgic boost. Whichever group you find yourself, please indulge us as we revert to times past and play the game once again…

German PMI – Manufacturing & Services, both rising….

Euro-zone PMI – Manufacturing & Services, both rising…

UK PMI – Manufacturing & Services…

Do you see it? For those pattern challenged we shall spell it out… The U.K. service sector has begun to contract.

So why did we drag you back a few decades only to point out that one forward looking indicator has begun to roll over? Because Greece is just a sideshow compared to the U.K. As we wrote in our Special Report on Greece, the problems of the Hellenic Republic will be resolved (the EU has no choice) and the whole experience can be used as a blueprint for debt issues in the U.K. and Japan.

Greece needs to raise ~55 billion euros this year – in the last auction the country received bids for almost 25 billion. As a percentage of GDP, Greece’s budget deficit is close to 12% – although we doubt that all the debt has been counted. As a comparison, the IMF estimates the U.K. budget deficit to be 13.3% of GDP. Not too bad…until one considers that U.K. GDP is $2.3 trillion!

This is why we are worried about the U.K. service sector rolling over. If the U.K. economy cannot mount a sustainable recovery then the ability to sell debt could be severely compromised. As the market is now focused on Portugal and Spain – they too will be sideshows once the market focuses on the U.K.

Disclosure: Short EUR/USD